Bharti AXA Investment Managers Expectations

December 15, 2008

Here is a brief excerpt from Bharti AXA Investment Managers presentation on expectations from the Indian Equity Markets.

The global economic slowdown has seen commodity prices tumbling down in the recent past. This has led to fall in inflationary concerns world over. In India the sharp depreciation in rupee since August 08 has however counter balanced a significant part of the fall in international prices. But still inflation has come down to single digits.

The flight to safety saw flow of capital towards the USD and yen leading to their strengthening. India also got impacted severely with FII’s pulling out ~Rs55000crs on a ytd basis.

Issues Concerning India:Export tonnage, rail freight traffic, auto production, foreign tourist arrivals are at a very slow or negative growth rates. Exports saw negative growth in Oct 2008, last seen in Oct 2002. Commercial vehicle sales collapsed in the month of October. Corporate tax which constitute 35% of the Total tax revenue declined by 20% YoY in October.

How Long Does the Pain Last:Historically looking at the indicators, the markets should be bottoming out in next couple of months. Market has on previous occasions taken 6 months to recover from market crash. Measures being taken by Obama in terms of TARP representing ~5% of GDP should help stimulate the economy along with other bailout packages. Also Oil at USD50 on average for the next 12 months represents a gain in purchasing power of nearly USD200 billion. In India with majority outflows done and valuations at an attractive levels the markets should also see a bounce back.

Going Ahead, 3rd quarter earnings are expected to be disappointing on yoy basis. We may see further downgrades in earnings which could put further pressure on markets. With ~27% of the Sensex weight in cyclical further downside in earnings is possible. However with declining interest rate scenario, Interest cost which was a major expense for the company would come down going forward. Macro factors like decrease in inflation, BOP, Currency stability and recovery in funding markets and revival of capex cycle should help the future corporate earnings in FY10.

With majority FII selling behind us and domestic flows expected to remain intact Bharti Axa expects India to decouple from redemption flows caused by deleveraging activities internationally. As compared to other economies India is far lesser leveraged and this should bode well for resilience of Indian economy.